Jim’s Notes Wednesday Recap & Outlook

Moving the Market – February 28th

The markets continued to consolidate ahead inflation data with the major indices closing lower. REITs, bitcoin, and defense sectors were the leaders of the day. There was plenty of consolidation and a relatively lethargic day for stocks again. Retail, small caps, and biotech tested the upside move from Tuesday. The downside was led by semiconductors, small caps, and oil services. Crude inventories rose for the fifth straight week. The price of crude however was flat, but it did fall 1.5% intraday following the data release. The commodity remains in an uptrending channel on the chart. On the economic side, GDP revisions showed growth at 3.2% versus 3.3% with the Fed still trying to tell the same story relative to inflation. They will get some help on Thursday with the PCE data. The later part of the week will offer plenty more data of interest to the markets. Outside the Market page has more. Overall it remains a wait-and-see game for the major markets. Plenty of talk about the markets being overbought as analysts point to insider selling, the percentage of shorts is up, retail sales are higher, indexes are at new highs, etc. The problem is that we have an administration that is willing to spend $2.50 for $1 of GDP. We have a Fed that is putting liquidity quietly into the system through banks, it is an election year, and as long as inflation is in a favorable range, and economics are tolerable, the markets can continue higher despite what anyone thinks… the point is you can make statistics point to your opinion, but it is a market of stocks and the charts will tell you very clearly the trend along with the winners and losers. Don’t sway your thinking by distorting the data to say what you believe.

The indexes weren’t great on the day as they closed mixed. Seven sectors closed in positive territory with a very mixed look to the day. Commodities were mixed as well. Crypto continues to be the bright light in the house. Overall consolidation ruled with some upside for sectors. The NASDAQ closed down 0.5%, DIA was down 0.02%, and the SP500 was down 0.1%. The major indexes were flat to lower on the day. The SOXX was down 1.1%. Small Caps (Russell 2000) were down 0.8%. The ten-year treasury yield was at 4.27% down 4 bps for the day. Crude Oil (USO) was down 0.3%. (UGA) was down 1.8%. Natural gas (UNG) was up 3.4%. The dollar was up 0.1%. We are focused on managing the risk in the current environment and letting it unfold.

Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…

Quote of the Day: “Only the mediocre are always at their best.” — Jean Giraudoux

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 8 points to 5059 moving the index down 0.17% with below-average volume. The index held the up trendline as we let the current consolidation unfold. Money flow is trending lower. Seven of the eleven sectors closed higher on the day with REITs as the leader up 1%. The worst performer of the day was healthcare down 0.5%. The VIX index closed at 13.8 higher on the day. There is plenty to ponder between the headlines and the facts. Watching how Thursday unfolds relative to the PCE data. The leaders show some rotation of late… Plenty of economic data to come as the month comes to a close. Patience is the key for now as the activity unravels.

Leaders:

XLK – Technology Entry $183. Stop $203. Bounce-off support at $183.50 and renewed the uptrend. Trading sideways. The sector was up 0.4% for the week. Tested lower. Tested the $197.60 support and held bouncing nicely on the NVDA earnings news.

XLY – Consumer Discretionary Tested support $171.50. Moved into a downtrend channel on the chart and moved back to the previous highs. Needs to break above the December high. The sector was up 0.6% for the week. Cup pattern on the chart.

XLF – Financials Entry $33.65. Stop $39.50. Broke higher from the consolidation pattern. The sector was up 1.3% for the week. Moved above the resistance at $39.28. Interest rates continue to be a watchlist item looking forward.

XLV – Healthcare remains in an uptrend from the October lows. Solid upside for the week confirming the move above the previous high. Entry $129. Stop $145. The sector was up 1.8% for the week.

XLP – Consumer Staples Uptrend remains in place breaking above resistance at the $74.30 mark. The sector was up 2.2% for the week. $73 is support.

XLI – Industrials Uptrend remains in play moving higher on the week. The sector was up 1.2% for the week. GE and LDOS adding leadership.

XLB – Basic Materials bottom reversal in play breaking above the December highs. For the week was up 2.9%. Activity picking up in the materials VMC and EXP. Let it run.

Laggards:

XLU – Utilities Moved back to the $60.10 support level and bounced. Attempting to break the down trendline. Watching how this unfolds. The sector was up 1% for the week. Solid bounce-off support – bottom reversal in play. Down 2% on worries relative to interest rates and decentralization of power grids… a by-product of clean energy efforts… Up 1.8% as the sector gets a big lift from CEG.

XLE – Energy Cleared $85.52 resistance and testing. Entry ERX $52.15. Stop $57 (adjusted). Let it play out. The chart remains in a downtrend from the September highs. Watching how crude plays out near term. Posturing to become a leading sector.

IYZ – Telecom Broke below support at $22.93 offering a downside opportunity. (own put options) Testing support at $21.74 if we hold here we will lock in our profit on the put trade. The sector was down 1.8% for the week. Solid gain on the short trade.

Losers:

IYR – REITs found support and attempted a reversal of the downtrend. The sector has been challenged by higher rates and vacancies in the commercial sector. The sector was down 0.3% for the week. Watching Interest rates near term. Setting up a bottoming pattern. Hovering around the $87 support line.

Summary:

The SP500 index was lethargic overall as the leaders are holding the trendline but not much leading being done. Money flow was lower on below-average volume. The index as well as the market is in a precarious position as it determines the next catalyst. There is inflation data, unemployment, and the FOMC meeting all on the horizon. Technically the uptrend remains in play and the buyers are present, but seeing some shifting relative to conviction. As seen on the chart above, the short-term trendline remains higher but there is a divergence between RSI and price. Remember two things; first, the trend is your friend, and second, don’t fight the Fed… Both are currently in play.

(The notes above are posted at the end of each week based on activity from the previous week’s trading. The BOLD/ITALIC comments are the current-day changes worthy of note.)

Key Indexes & Sectors To Watch

The NASDAQ index closed 87 points to 15,947 as the index was down 0.55% for the day. No real driver in either direction as the mega caps struggled and small caps were lower. The SOXX was lower with a test and software was flat again. The uptrend remains in play as we manage the risk and watch the leadership. Plenty of activity and speculation to filter through.

NASDAQ 100 (QQQ) was down 0.53% for the day as the mega-caps weighed on the sector. The uptrend remains on the chart. SOXX and IGV were lower on the day as we continue to see consolidation on the charts. Watching AAPL and GOOG as the laggards here. Looking for some defined leadership in the sector. Manage stops and let it play out. Entry $354.20. Stop $425. Patience.

AAPL tested the $180 support level again. AMZN tested the 20-day EMA and bounced. GOOGL broke the 50-day MA and fell 4.4% on AI issues… down 1.9% offering downside trade (May $135 puts @ $5.40). MSFT testing the 20-day EMA. META & NFLX held the 10-day MA and bounced. QQQ held the 20-day EMA and bounced. Adjust your stops if you hold positions and manage the risk going forward.

Semiconductors (SOXX) Added position at $601. Stop $625. Tested lower… and bounced on NVDA earnings… The sector was up 1.2% for the week. The uptrend from the November lows remains in play. Testing.

Software (IGV) tested lower to support at $410 level and held. Bounced on NVDA earnings and needs to hold the $420.25 level of support. The sector was down 2.7% for the week. Looking for opportunity on directional decision.

Biotech (IBB) moved above the downtrend from the January highs. Watching for some momentum to the sector. The sector was up 1.2% for the week. $136.50 level cleared on the upside. Inside day.

Small-Cap Index (IWM) downtrend reversal with a move back toward the December highs and tested. Added at $192.13 upside move. Stop $192.13. Cleared $198.64 bar. One big volatility mess on the chart… patience for now. Gapped higher on Tuesday… can we clear the December highs? Not yet, tested on Wednesday.

Transports (IYT) Broke higher from the sideways trading range and attempting to move higher. Despite the Red Sea issues continuing to escalate the sector is moving higher. BDRY has responded well, bouncing back from the test at $8.95. The sector was up 0.03% for the week. Entry $266. Stop $272.

Red Sea issues are continuing to be bad. More activity over the weekend with destroying communication systems. There have been ships on fire, protection vehicles turned back, and just an overall mess. The cost in some cases is over $100k per day. The true impact of this on prices has yet to be passed through to consumers… this is a growing issue so look for disruption to the supply chains. BDRY entry $9.70. Stop $13.05.

The Dollar (UUP) The dollar bounced off the December lows and has not looked back. Stronger dollar in January. Fed talks on higher interest rates are keeping the dollar higher with some testing this week. The buck was down 0.1% for the week.

Treasury Yield 10-Year Bond (TNX) The yield on the 10-year bond has been rising since the low in December. The yield moved from 4.29% to 4.26% this week down 3 bps. Higher rates are not good for bond prices or banks at this juncture. TLT was up 0.6% for the week. Solid bounce on Friday helped the cause. TLT is trading at $92.80 support.

Crude oil (USO) bottom reversal last few weeks has moved to resistance at the $73.25 level. Production has been higher than expected as OPEC juggles its production outlook. Of interest to this conversation is the increased production in the US. OPEC has set a meeting for March to discuss extending their production cuts. As seen on the chart it is attempting to renew an uptrend from the December lows… plenty of volatility to go with it. The commodity was down 1.2% for the week. Entry UCO $26.70. Stop $28.60. Patience. Back above resistance and tested again?

Natural Gas (UNG) The move higher from the December lows came to an abrupt end with natural gas falling on projected supply rising the first half of the year. We traded the upside move and the downside move. Pressure is on the downside based on the White House taking away permits for new LNG facilities for transport globally. Companies are starting to cut production to stabilize prices. The commodity was up 2.7% for the week. Plenty of intraday volatility closed higher… bottom reversal setting up. Added position entry $16.55. Stop $16.10. Bear flag pattern on the chart.

Gold (GLD) The commodity traded sideways with some volatility sparked by a stronger dollar the last month. The metal did bounce at support $183.72 and attempted a trend reversal. The metal was up 1.5% for the week. No change.

FINAL NOTES

Wednesday: The broad indexes closed mixed for the day. There is plenty of chatter and speculation on direction and leadership. Seven of the eleven sectors closed higher with narrow leadership again on the day. VIX moved up to 13.7 and anxiety levels subsided with the consolidation. The key first levels of support were held and waiting. Economic data remains suspect at best, and the Fed continues to talk last of the year for rate cuts. All said it was a sluggish day as we continued to be patient. It is interesting to note the jump in crypto stocks of late as we adjust our stops on positions. Areas of focus for Thursday… response to the PCE data in the major indexes.

Longer-Term View: The uptrend from the October lows continues. The index moved above the July and August highs and broke above the 2021 highs to a new high. This resumes the long-term uptrend from the lows of October 2022. Currently, we are allowing the short-term to unfold in light of the longer-term perspective… don’t combine the two as the weekly charts look very different than the daily. A look at the weekly chart below shows the uptrend from the October 2020 lows is still in play at a slower degree of assent. There are always positive and negative swings in a longer-term trend. A look at the daily chart from the October 2022 lows validates that premise with plenty of volatility along the way. Short term the market has resumed the uptrend from the October 2023 lows. The current bounce remains in play despite any issues on the horizon. Current activity shows optimism from the buy side and we will take what the market gives. We look to charts and fundamentals for answers. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads.

Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develops based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher-risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.

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